Microfinance Boosts the Poor

Does microfinancing help low-income entrepreneurs in developing economies such as Mexico and India more than it hurts them? Here are two independent views on the subject. Are you pro or con?

Pro: Plenty of ROI

There is a misperception that the “high” interest rates of microfinance gouge the recipients. To the contrary, borrowers benefit significantly despite “high” interest rates.

Why? Returns on investment for microenterprises are extremely high. Studies—including those by my own organization—have estimated returns from microenterprises fall in the range of 50% to 100%. When a borrower is earning such high returns, paying interest rates in the range of 26% (what SKS charges), or even higher, is perfectly acceptable to a borrower.

Such high returns exist in microenterprises because microentrepreneurs in the developing world run businesses (1) that primarily use family labor, which is more productive than hiring outsiders, (2) that have low infrastructure costs (e.g., village groceries are often home-front stores), (3) that are in the informal sector so there are no taxes and legal costs, and (4) where financial capital is a small percentage of the overall inputs, which are primarily labor. This results in extraordinarily high returns for microenterprises.

As to why microfinance institutions need to charge such “high” interest rates: They have to cover the transactions cost of lending to the poor. It is much more expensive to make a large number of tiny loans than to make a small number of larger loans. In addition, microfinance institutions often have to provide doorstep service—with loan officers traveling to remote villages to give loans and collect repayment. That’s much costlier than setting up a branch office.

Of course, as with any sector, there are the occasional instances where microfinance institutions take advantage of near-monopoly situations and charge interest rates almost as high as loan sharks—50% to 100%. This is not ideal. But capping interest rates is not the best way to solve that problem. Instead, we should stimulate competition so that the existing microfinance providers must lower rates in order to survive.

Con: Too Steep

Microfinance services can certainly help the poor when priced fairly. When institutions set interest rates to cover efficient delivery costs, the result is win-win—long-term, sustainable financial services that generate a positive impact on the poor.

But every additional dollar of excess profit investors generate for themselves through high—and often deceptive—pricing comes directly from the pockets of the poorest members of our society, leaving the poor still poor while the wealthy become wealthier.

Pricing products at a fair level does not always happen when those setting the price are in a position to receive personal gain through high pricing. As microfinance moves from the nonprofit into the for-profit world, we are seeing more institutions that want aggressive profits. Sustainable pricing is mutually beneficial; however, as shown in the story (BusinessWeek, 12/13/07), some institutions have gone too far.

Sadly, we have reached a point at which some microfinance institutions are blurring the line between constructive microfinance and exploitative money lending. Over the past 25 years we have successfully learned how to get financial services to the poor at an affordable price, but now those lessons are being applied and distorted by institutions with different values and goals.

We in the microfinance industry must continue our plans to build a vibrant market of microfinance services by setting fair pricing and profit levels, and holding one another accountable to these standards. We must build consumer protection programs to shield the poor—from ourselves. We must adhere to and defend the original principles of microfinance, and not allow people interested in personal or corporate gain to destroy what we have taken decades to build.

Ironically, the first pawn shops were started by churches to assist their parishioners. Pawn shops then went in a different direction. We must act now so that microfinance does not follow the same path.

Opinions and conclusions expressed in the BusinessWeek.com Debate Room do not necessarily reflect the views of BusinessWeek, BusinessWeek.com, or The McGraw-Hill Companies.

Reader Comments

george

What an evil stench this story gives. The rich receive their spiritual blessings from Satan to bleed the meek, poor, and ignorant and even further press ever harder their shiny new patent leather heels into the necks of their clients. May you choke on the money.

sue

How sad that something so hopeful inevitably turns extortionate. Micro-credit was seen as a way to help poor women and other disadvantaged groups to become entrepreneurs. This is an area where government should be involved.

Ernest Hemple

Capitalism without charity is a vice. Those who are engaging in this type of activity are creating debt for themselves that they will never be able to repay. Life never ends.

Jim

Exploitation of the poor. I know it well.

This motivates me to give back to society by purchasing cattle for the female population on an individual need basis, so she and her family can become self-sufficient, proud, and free from these capitalist tyrants.

George P.

The real issue here is not whether micro-finance helps the poor or not. The real issue is the immorality of the outrageous interest rates being charged, rates that would even give old-fashioned Mafiosi pause.

As for Wal-Mart, apparently it is not enough to exploit its American employees with poor wages and benefits, as it is now actively joining the loan jackals fighting for the carcasses of the Third World poor.

Just because the local conditions allow usury, is it all right to join the fray fleecing the poor? If this moral relativity is the foundation of Wal-Mart corporate governance, I highly recommend that it open a superstore in the middle of the New Guinea jungle and start selling human carcasses; after all, the local conditions there allow cannibalism, right?

Don Christie

Unfortunately this practice is also very widespread here in the United States.

- Do the math on an overpriced item from one of the rent-to-own outfits.
- Calculate what it costs for your bank to cover a $10 overdraft.
- Check out U.S. Bank's rates for a small 30-day loan: "Finance charge is $1 for every $10 advanced (120% APR)."
- Take a look at the late charges and over-the-limit fees on your credit cards.
- Calculate the actual costs on a car purchased from one of those easy-credit car dealers.

Preying on the poor, weak, and foolish is also alive and well here in the United States.
Don

Jayne P

I am disgusted. Not because the foreign rich exploit the foreign poor, but that the world's largest retailer would join the fray and justify it by "when in Rome, do as...." Yes, sorry, but I truly believe that Wal-Mart, with its Christian base, has an absolute moral responsibility to run its banking organization in a way that could help the poor, not just use them. Not only do they have the wherewithal to lend money at a reasonable interest rate and still make money, but also they would eventually pressure other lenders to do the same. I have spent $24,809.25 at Wal-Mart in the last three years. It will be very inconvenient for me, but they have seen my last dime. I hope other department and grocery stores will use my money more wisely, if not with more social responsibility.

Ajaita S.

Chuck's point is valid when he is referring to microfinance organizations that have gone beyond the costs for their interest rates--i.e, an IPO or Compartamos-like organizations. However, Vikram's point must be noted--in order for MFIs to sustain and continue reaching out to the poor masses, they must charge interest rates that cover and help expand operations.

Financing to the poor is a lot more expensive than commercial banking for numerous reasons--much more intense one-to-one interaction, door-step banking, costs of transactions, time to educate, etc. It is a lot more intense than simple lending, which is why costs are significantly higher in the market.

Additionally, as Vikram states, the rate at which most MFIs that are solely charging operational and expansion cost-based interests rates are acceptable to the community. If we do not maintain a competitive edge and focus on efficiency instead of playing this regulation game for interest rates, MFIs will not survive, leaving the poor in the hands of the true exploiters--pawnbrokers and money lenders.

pete

Many small U.S. investors and retirees would be more than happy with a reasonably safe yield of 10% or so for at least part of their savings. Is there an efficient way to increase returns here while lowering the rates charged in Mexico to reliable people?

pepxter

Well, Pete, probably a reasonably way to do what you suggest would be creating a micro-financial institution, maybe a public or supra-national one (a private one may prove to be too abusive with the rates and colluding with existing players in the market that manage the money to lend to poor Mexicans at lower rates). While U.S. investors receive a reasonable and stable yield through time, the rates for small loans would drop in Mexico. Add that to the creation of a credit bureau and further information available of the current customers, making them more reliable over time and it less expensive to maintain such a scheme. That is just a simple idea.

Now about MFI, these aren't bad nor good. They are simply a tool, and much depends where this financial tool is applied or in which kind of investment.

Steven Dexter

This is seriously the best thing ever. I'd like to find out where I can invest money to get some of the profit from these organizations. I don't get why everyone feels sorry for these people; it's just plain business, and if you're able to make money with high-interest loans, then great. It's a huge risk lending to the poor and uneducated, so they should have to pay a lot more.

Does anyone know of any "pure plays" for micro-finance? (Not the stupid nonprofit organizations, what a waste of time.)

Jerome Peloquin

Criticism and open debate such as this and other public forums are the best antidote to corrupt lending practices. The bright light of public opinion and disclosure is a good thing. Let's "out" the thieves. Still, like any other organizations, micro-finance institutions can only be as honest as the people who run them.

When local loan sharks charge several hundred percent to poor borrowers, a 50% loan looks like a real deal. And it is. If we look for the evil in men's souls, certainly we will find it. Another issue is the MFIs that do not really lend to the poor but cater to the underground economy of the un-banked. This has been an under-publicized and somewhat pervasive practice.

On balance, Compartamos included, I am pro MFI. I believe, based upon the data I consider credible, that more people are helped than hurt by the movement. Certainly it needs monitoring and an independent set of measures that include both profit margins and social performance should be published on all MFI's. It will be hard to get honest, true data, but still it needs to be done.

We should try to maintain a balance and not throw out the baby with the bath water. After all, we are capitalists.

Chris

Folks, folks, folks, please. Not to worry. Where there is high profit, there will soon be high competition. Take a look at computers, and before that, airlines. And before that, railroads and steel. New markets always draw higher returns at first, but the markets, if given the freedom and minimal regulation, will right themselves. One should worry more as to whether there is rule of law in Mexico and a free and fair business environment.

OJay

I must agree with Chris. While the actions of many of these financial institutions appear scandalous, we should see this as a link on the way to financial prosperity for the working poor. Risky credit must provide high returns to compensate--that's a fact. Do keep in mind that as more institutions enter the fray, they will certainly drive these required rates down. More government interference would not necessarily lead to a better life for these people since many would lose out on the opportunity to get the much-needed loans as the institutions restrict lending. Let's have a little faith in the power of the market.

Clement Wan

I doubt that Oscar Wilde and I would have agreed on much, but his quote "a cynic is a man who knows the price of everything and the value of nothing" seems apt. Ask borrowers what they would prefer: a loan at a high price or no loan at all? Further, which would they prefer: higher prices or poor service (alternatively, next to no service at all)?

It doesn't take much to realize that the unbanked/poor make many of the same tradeoffs we do. What use is it to get cheap loans if it means you have to wait a full day to make a simple deposit (a day of lost wages or lost sales). What use are cheap loans where your loan officer may intentionally or unintentionally misaccount for your money? Further, even of the interest rates that Mr. Waterfield deems "acceptable," how transparent and open are they with their clients? As Mr. Waterfield is quite aware, it is not unusual for there to be undisclosed costs or fees. Further, as Mr. Waterfield I'm sure also recognizes, microloans are also not for everyone. Would it not be great if we could all borrow funds at a low cost or no cost at all? Or would it? Surely, if anything, the recent subprime loan issues in the US show the importance of differentiating those who want to borrow from those who can afford to do so sustainably.

Chuck Waterfield is someone who has devoted many years to microfinance, and his accomplishments both in actively developing discussion in microfinance and his tools for financial modelling are quite appropriately applauded. It is therefore with disappointment that I read his comments/position that takes an emotional approach over a rational one. There are three significant problems with his argument:

(1) The value of loans is not the same for all borrowers. A more efficient borrower or a small business owner with a better idea may be willing to pay more then for someone whose business is less so. Therefore for every price, there will be some people who can benefit more and some who benefit less.

(2) The money and the ability to distribute that money efficiently for microfinance is not unlimited. But who makes the choices of how that money is lent out and ensuring that a transaction takes place? In the most thriving economies, it's a combination of price and risk. Further, the reality is that many borrowers in the developing world already have a choice of at least one other microfinance institution to borrow from. Even if this is not the case, I wonder how competitive and popular the institutions who offer an "acceptable" or "moral" interest rate are against others. Is it not an indictment of the value that those microfinance institutions provide if despite lower prices they are not the first choice of borrowers?

(3) For those who take the position that there is a moral difference in high prices vs. low ones, given there is no magic wand we can wave to do away with high prices, is it morally better that the poor not have access to loans if they are high ones? If it is, is it still their position that microfinance is about empowering the poor? Is not one of the basic attributes of empowerment the power to choose?

The problem with microfinance is not high prices. The problems are far more complicated. It is the lack of transparency and as a corollary, a lack of competition and in many cases, like many top down approaches to development, services that borrowers do not want/need and are unwilling to pay for and therefore contributing to higher prices.

Richard P Rosenberg

I, like Chuck Waterfield, believe that interest rates in some microcredit institutions are too high.

But I think it's very important to note two things:

(1) Profits as high as the ones in the Mexican micro-credit market are very unusual.

(2) As others have commented, the administrative costs of making tiny loans are inevitably very high, so even if a microlender is making no profit at all, the interest rate it must charge to cover its costs will strike most people as "disgusting," "obscene," "usurious," etc. In the case of Compartamos, if the company priced its loans so as to make no profit at all, the interest rate to the borrower would still be more than 60%, and would provoke howls of protest despite being perfectly reasonable.

Tim

Is there no end to what we are willing to do to the poor and undereducated? I find it appalling that not just American companies but also other companies from the developed world are willing to take advantage of the less fortunate among us.

We really have not learned much in the last 100 years. It is no wonder that most of the underdeveloped world either does not trust us or steals the money we give them. I wonder where they might have learned that, hmm.

Wal-Mart, shame on you.

Mario Silva

I hope all this liquidity being pumped unto the hands of the lower economic classes does not create a credit bubble as in other countries. As inflation increases in countries like Mexico and past-due microloan portfolios bloat, which will most probably be the case pretty soon, the Elektras and Wal-Marts will suffer the same consequences that many greedy financial institutions are currently whining about. It'll boil down to some kind of poetic justice.

siddarth

The whole story reeks. The microfinance industry must get its act together. How in the world can you justify a 26% interest rate and also claim that the people who borrow are more efficient (read Mr. Akula's opening paragraph)? They generate very high returns. This does not mean you can charge the sky. Mr. Akula, you talk about stimulating competition. What is the guarantee that cartelization will not occur and prevent rates from coming down?

Microfinance is great, but people who get loans must be educated about the very high interest rates that they will end up paying.

P.S. Businessweek, please do a similar article on microfinance in India to check the ground reality.

Seb

Having just read BW's article "The Ugly Side of Micro-Lending," about Azteca in Mexico, I can't help but feel that the writer has gone for sensationalism by failing to highlight the cultural context.

It's very easy to write a one-sided article, highlighting how business failures have resulted in the lender coming in to repossess belongings--be it in Mexico, the U.S., or anywhere else in the world. The result is the same, casting the financial institution as the bad guy.

Kassim Nurudin Hussein

The high interest is attributed to different reasons in different economies. One important determinant is the cost of capital. If microfinance sources its lending funds from savings, it is capable of lowering its lending rates. The other significant determinant is cost per borrower, which is attributed to staffing cost per borrower and operating costs. These two factors are normally variables for efficiency. Unfortunately, microfinace likes to operate in the levels and styles of conversional banking businesses. The encouraging experience is that banks have been down-scaling, trying the approaches of "down-to earth" strategies of meeting micro-credit needs as pioneered by Grameen banks.

Kim Wilson

I find it interesting that so many readers are satisfied with a double standard--low interest rates for "us" and high interest rates for "them" and full disclosure of rates and practices for "us" and nondisclosure for "them." That is all well and good for a purely capitalist model, but microfinance is not that model. It is enormously subsidized. No one really knows how much free and low-cost money pours into these institutions from governments, UN agencies, the World Bank, foundations, and religious institutions, and now Kiva, but it is giant. Taxpayers, churchgoers, and well-intentioned citizens, do you want your money to help foster subprime loans overseas, or would you prefer it go to education, clean water, and health? Or how about laws that protect borrowers from microlenders?

Irfan Memon

Interest rate is directly proportional to risk factors. Whenever any organization is going to serve clean loans, due to risk factors, it has higher interest on credit cards, personal loans, etc. Microfinance is dealing with a group of persons no other financial sector is ready to service. By offering such services, microfinance institutions are serving high-risk communities.

Interest Rate = Cost of funds + Expenses + Inflation + Risk Factor etc.

Sam

Fortunately, Mexico is not the best example of microfinance.

Interest rates are clearly too high in this case, but the positive outcome is that the playing field is becoming established so that other players can come in at a lower APR to compete.

Clearly there are a lot of hurdles, including government and education, but progress is hardly ever a straight line in real life.

jkoch

Are Banco Azteca's rates and fees higher than the competition's? If so, the borrowers would steer clear. If not, why pick on that bank? Yes, the owner has enemies, mainly because of his hold on a TV franchise, but are the bank's lending practices really very different from the others'?

Some people argue that people with scant credit history (aka poor) should qualify for reduced rates, but that means taking higher risks for fewer rewards. And, if subsidized, such a program would merely encourage prosperous applicants to understate income.

People who think Grameen Bank sustains itself by charitable lending terms have not looked at its Web site. Its "latest" (rather stale) 2005 annual report makes no disclosure of past due loans. A holy rollover miracle, surely.

A better way to help the poor would be to abolish lotteries and encourage people to invest instead in bonus coupons that could be redeemed with interest when the person needs to buy an appliance or piece of equipment.

Placid Dingue

Microloans might certainly help the unbanked people if it is simultaneously implemented with other initiatives that promote the development of business opportunities while supporting access to market and skill building. In developing countries, for example, what is keeping the poor poor for so long is not directly the lack of money to lend but the poor organization of their market environment and society in general, the lack of skill and opportunities.

mecham

If the poor know exactly what the final sticker price will be for a loan (there was one example of this being the case in the article, and the individual still took the loan), is everybody satisfied?

In my mind, this is primarily an issue of education. Perhaps Azteca has created a great opportunity for a number of profitable ideas.

Perform the research--and sell it in a pamphlet with 100% net profit (cost to produce, market, and sell is 40 cents, then sell for 80 cents). Set up carts in front of all Azteca banks and offer free cookies for those who buy the pamphlets. Make the marketing enticing for those truly considering a loan. And use an Azteca loan to do it.

What, many of the poor can't read? There are many solutions But educating the poor solves only part of the problem--there are thousands of solutions. What, another problem? There are solutions, solutions, solutions.

Whether or not the business idea I proposed is stupid, there are still thousands of good ideas out there. The tough part is finding somebody with a solutions, entrepreneurial mentality.

All that is needed is a market in which entrepreneurs have a fair chance to capitalize on opportunities, and then get out of the way and allow entrepreneurs to work their magic.

Many people want everything to happen instantly, and it just isn't realistic, and they "take the temperature" of a situation as often as daily. If you want something to happen instantly according to your beliefs, become a dictator. That way you can control everything and make sure everybody behaves like they should.

Keep in mind that the majority of "the poor" in America live better lives than the middle class did 100 years ago, and in some respects, better than kings hundreds of years before that.

I see all the injustice and corruption, too, but humanity seems to be making progress.

henry oloo oketch

I am writing from Nairobi, Kenya. Having graduated with a master's degree in economics in July, 1990, I have worked in microfinance throughout until now. I am worried about commercial interest in microfinance. I support the idea that services must be sustainable, but this should never be at the expense of the clients, who are looking to capital for help in breaking out of their poverty. Today, there is so much capital being raised in the United Kingdom, Belgium, and the USA, yet this money doesn't seem to be intended to refinance microfinance institutions that need it most, particularly in Africa. I have just completed a survey of the African microfinance industry for the Africa Union, and found 7,019 MFIs throughout the 53 AU member states. They have at least U.S. $2 million in active loans and have good repayment rates but cannot meet demand due to lack of capital. What seems to be happening is that investors are waiting for these institutions to fail and then buying them for a song. Already LONRHO has forced out smaller investors in SOCREMO (a Mozambican MFI) and taken majority share-holding. Opportunity International invested in WEDCO, Kenya, just when it was on its knees. There is something sinister cooking with the investors.


Stella Amito Ottoman

It is so sad to learn that MFIs are moving away from not-for-profit to profit-making organizations when the initial aim was to help the poor become better off. In Uganda, there are microfinance institutions with the aim of savings and loans advancement to clients. The poor get attracted when they hear of loans at a deceitful rate of 3%, which ends up as high as 49% in reality.

Front Page Microfinance in Uganda was recently closed and under police investigation for fraud. Clients who saved up, say, 700,000 Ugandan shillings, were not allowed to make withdrawals of even 300,000. MFIs have become real thieves in broad daylight.
Ottoman

Ralph Essem Nordjo

To some extent, one can say that microfinance helps the poor irrespective of their challenges, but on the balance I believe the voiceless entrepreneurs are more exploited.

Most microfinance institutions, especially the large number of financial NGOs that provide credit facilities and social services to their clients, ride on the ignorance of these poor. What makes it serious in some developing countries like Ghana is the fact that the microfinance, especially service provided by these financial NGOs, is not regulated.

The informal sector operators enter into credit agreements with the microfinance institutions without understanding what they sign for. At the end of the day, with the high interest, there is a high default rate as well. The outcome of these default rates becomes unbearable, because the MFI institutions do not use appropriate methods apart from harassing the vulnerable to collect their money.

The situation becomes worse--reckless lending is provided to these entrepreneurs in the sense that they move from one lender to another. In the long run, despite the fact that a few of them are able to acquire some assets and afford daily meals, the situation is highly unbearable for them.

In short, the informal sector operators are exploited by the elite in the name of the private sector as an engine of growth and development and poverty reduction.

S A Raghu

The debates on high interest rates in microfinance all seem ideological with moral overtones. But not one seems to have addressed it as a pure financing issue. If we grant that microfinance is ultimately banking, this boils down to lending out borrowed funds at a markup over borrowing cost. In a pure bank model, the gross profit is the difference between the lending rate and the deposit rate. But when we consider the fact that microfinancing agencies are lowly leveraged, i.e., largely funded by equity rather than debt (deposits), they would, by sheer compulsion of arithmetic, need to charge a much higher lending rate to generate the same ROE that a conventional bank (with a high debt equity ratio) would. So what's the issue about high interest rates? If MFIs were to go the way of the conventional bank (higher leverage, lower lending rates), they would be no different from banks, would they? Besides, we forget the most critical factor that makes banking viable--not profits, but liquidity. It is the orderly repayment of loans (rather than profits) that enables banks to remain in business. In an equity-financed structure like MFIs, the liquidity risk is greatly mitigated. To sum up, the lending rate cannot be divorced from the financing structure.

Warner Woodworth

The recent BusinessWeek reporter attacks on microlending begun Dec. 13, 2007, are curious criticisms. While the magazine historically has covered several cases of microfinance in valid ways, the latest diatribe seems misconceived.

It smacks of the same critical tone of a Wall Street Journal article several years ago that attempted to discredit the Grameen Bank of Bangladesh. In that case, the writers had not done their homework, and accused Muhammad Yunus of not being transparent about the bank's operations. In fact, just the opposite was true, and Grameen is even open today.

What BW reporters Keith Epstein and Geri Smith have done in their criticisms is build a straw man (Banco Azteca), and then proceed over the next nine pages to tear him down. To link the unscrupulous and predatory lending practices of Banco Azteca, Wal-Mart, and Compartamos with the effective practices of most microcredit NGOs is akin to linking Enron, Tyco, and Worldcom to moral capitalism. The latter, of course, is ludicrous. So is the former.

One of the major schisms in lending to the poor these days is the growing conflict between non-profit humanitarian organizations vs. the institutionists. (See this writer's oft-cited article, along with my co-authors, in the Virtual Library on Microcredit entitled "Where to Microfinance," http://www.gdrc.org/icm/where-to-mf.html.) The movement began as a humanitarian strategy to provide tiny loans to the "poorest of the poor." With $30 to $80 loans, disenfranchised families at the bottom of the social pyramid could obtain credit without collateral, without a financial history, at viable interest rates.

With such practices, they would thus be able to feed their children two meals a day and perhaps eventually be able to send them to school. It was never intended to give the lower classes thousand-dollar loans so they could buy TVs, CD players, and furniture. Yet BusinessWeek describes families like the Arana family as recipients of microlending who were driven into huge debts by buying consumer products. It's a sad and cynical tale.

Genuine microfinance must maintain its true mission of microenterprise job creation, such that the poor can move toward economic self-reliance. In its purest form, financing the poorest is about grassroots self-sufficiency, not banking for commercialization.

Over time, the bankers and major aid organizations that originally disputed the viability of microcredit have begun to jump on the bandwagon. Unfortunately, some microcredit organizations are following suit, and seeking entry into the capital markets. Who would have guessed that bankers, known for their rigidity and lack of innovation, would become role models for NGOs fighting poverty around the globe?

With Yunus receiving the 2006 Nobel Peace Prize, our efforts are accelerating. But pioneering success is also fraught with danger. What for-profit microlenders are now starting to call microcredit is largely just a different variation of traditional loan sharks. They seek victims of poverty, persuade them to take out huge loans, and pile on interest charges that even the rich would not be able to pay back.

Hence, the problem becomes one of mission drift--away from charitable lending on a miniscule scale, to instead move microcredit into the formal economy of traditional capital markets. In effect, this simply becomes an instrument for victimizing poverty's most vulnerable families. But it seems to be growing like a feeding frenzy.

The ugliest aspect of such practices leads to interest charges of 80% or 90% (or even higher), which is no better than a borrower is able to get on the street in the black market or underground economy. If you like what Wal-Mart's big box stores have done to decimate local entrepreneurship in small town America, you are going to love "Banco Wal-Mart" as it spreads its tentacles to 100 stores across Mexico over the next several years. But at least Wal-Mart admits it is becoming a bank.

Compartamos is not even honest about it. It started out as a little NGO truly serving the poor, but recently has shifted its focus from nonprofit to becoming a for-profit institution. Its annual return on equity of 53% in recent years is akin to the financial schemes of the New York mafia. Its top executives may call themselves agents of change, but in fact they are preservers of the status quo. These unscrupulous officials enjoy huge financial success at the top of Mexican society, while the poor are exploited in the shanty towns of big cities, paying APR rates in excess of 100% a year.

Let us remember the famous words of Milton Friedman, that the "only responsibility of business is to make a profit." At least he was forthright about his objective. Fortunately today, Friedmanism is becoming repudiated by many corporations in the formal sectors of the financial world as CEOs begin to shift toward a new vision of corporate social responsibility. Yet a few predatory microfinance organizations are moving in the opposite direction. Que lastima! Instead of chanting such mantras as "The poor deserve credit," they ought to shout the gleeful slogan of "master of the universe" CEO Gordon Gekko in the Hollywood film Wall Street: "Greed is good!"

If such individuals have their way, will microfinance become a haven for corporate raiders and takeovers, junk bonds, interlocking boards, along with insider trading, golden parachutes, and back-dating CEO stock gains? A scary thought.

For myself and many others who have sought to pioneer the microcredit movement and have helped to establish thousands of small NGOs, which really are not-for-profit, we will keep the heart and soul of the movement alive by not becoming just another bank.
Dr. Warner P. Woodworth
Professor of Organizational Leadership & Strategy
Marriott School, Brigham Young University

Mohammad Baktiar Rana

Poverty is a complex and difficult issue to configure. Microcredit is one of many tools to combat poverty. The term micro varies from country to country due to its grassroots economic condition in poverty stricken areas. In this particular article, the cited microloans in Mexico will differ from those of other countries. And definitely the people who want to be involved in microcredit missions should have the high moral principle to serve their target clients with utmost transparency. Spending extravagantly to compensate higher management and leading a trendy executive life conflict with the poverty-alleviation missions of microfinance institutions like the World Bank and United Nations organs. Both of these organizations' basic philosophy is to eradicate poverty from consultants' gossip in five-star hotels.

Priya Bajaj

I notice three points here in the discussion.

A market like Mexico that is charging at the rate of 80% to 120% and is largely guided by Capitalist practices is being compared with the Indian micro finance sector, which on an average charges clients 25% to 31% and helps them to escape the poverty trap in a time frame of 17 to 24 months on average.Though it takes no time to become what we aim to defeat--a typical moneylender in India who charges at a rate of what Mexican MFIs charge, so it's good to keep a self check as an industry in the backdrop of such examples.

All money raised in equity and all profit made is being labeled as exploitative for poor and serving rich shareholder beneficiaries, whereas in reality MFIs run on thin profit margins, and share holding patterns are inclusive if we see the share holding patterns of most MFIs that are transparent in their sheets.Although there is a real threat of corporate sharks making hostile bids to the profitable entities in industry, regulatory bodies can intervene here probably with effective laws rather than making attempts to cap interest rates that can be controlled by market forces.

Last, cynicism can play the other way round, too. It's easier to sit on our laptops and reject the genuine attempts of creating impact on some lives, but getting down to the actual nitty gritty of converting that 24% rate of interest charged and taken from poor to their own advantage in a sustainable manner over a period of time is a completely different ball game.

Dick Moxon

There is never going to be a "great wall." We should not take the Mexico example to represent the typical case of microfinance interest rates. In other countries in Latin America, rates are typically not even half of what they are in Mexico, and in the countries where microfinance has the longest history, such as Bolivia, interest rates in microfinance average about 25%. That may still sound high, but interest rates for anyone in Bolivia are higher than in developed countries.

Mexico is an extreme case, and my guess is that in a few years the interest rates there will be much, much lower.

VantagePoint

We should congratulate Compartamos for not being one of the many microfinance failures in the world.

It seems that the social microfinance crowd finds it easier to forgive losing investor/donor money completely instead of actually making the business a success.

If the related donors aren't happy because of high interest rates, then it's their own fault that they didn't outline those conditions at the outset. And if said donors were uncomfortable with what is clearly the market rates for that line of business in Mexico, then they should stay out, instead of getting in and then criticizing success.

What would be the case if Compartamos hadn't made their project a success? The Mexican market interest rates from loan sharks to pawn shops to regulated banks would still be as high as they are. Now at least Compartamos' success will potentially attract new market entrants, and natural market forces will come into play.

The fact that Compartamos created great value should be applauded.

Peter James

Any lending at interest given the current private banking monopoly-money creation system alays fails, taking the poor and working class down with it.

Let's say there is $100,000 circulating in a third world town. In comes a microfinance entity injecting $100,000 in new debt money at 30% interest. Within 3 years, both the loan principal and the orginal $100,000 is gone from the community.

The only cure is for the town to take out new loans for $200,000.

Google and watch the "Money as Debt" video to understand how evil this is.

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